27 Jul 2018

Dire Straits

One of the Cook Strait ferry operators, Strait Shipping, was mentioned in the news recently.  Although it doesn’t feature in any of Castle Point’s investments, it did tweak our interest. 

 

Strait Shipping was established by Jim Barker in 1992, who needed a reliable and cost-effective way of moving his livestock between the North and South Islands. Strait Shipping was what might be considered a ‘disrupter’, a new entrant with an offering capable of taking material market share from the incumbent. To truly qualify as a disrupter, the new entrant generally needs a different operating model, resulting in either a superior offer or significantly lower price.  In this case, not being owned by NZ Rail was enough.  The ferry service underwent numerous changes in direction and in 2016 the Barker family sold to the Australian based Private Equity firm, Champ 

 

Several times every day most of the company’s assets, staff and customers are sent across the Cook Strait. We’re not talking about the levels of risk taken on by explorers crossing the Pacific in canoes, Christopher Columbus, or competitors in the Volvo Ocean Race, but neither are we running a business that delivers parcels, runs a seaport or airport, generates electricity from rain or manufactures cement and plasterboard. This is a tough business. Volatile fuel costs are a significant input, the main competitor is state-owned and does not necessarily price commerciallyweather events frequently lead to delays and even service cancelations. And, if significant returns can ultimately be made, there is little to stop another crew (pun intended) buying another ferry and setting up in competition. Congratulations are indeed due to the Barker family. 

 

More recently, Champ has brought on a co-investor, Macquarie Group. What tweaked our interest was Macquarie’s reported intentions for their new purchase. The Macquarie infrastructure funds already own several ferry operators such as Condor Ferries, Wightlink, and an Isle of Man operation. The Strait Shipping entity is expected to be combined with these operations and marketed to “infrastructure-minded” investors. 

 

An “infrastructure-minded” investor we suspect is expecting investments with reliable income characteristics, that have traditionally included the likes of airports, electricity networks, toll roads and seaports. These assets are typically unique, expensive to build and have little competition, resulting in dependable long-term profits, often to the point that they are regulated.  

In our opinion, a ferry operator is not an infrastructure investment. Compared to its transportation peers it is closer to an airline, a shipping company, or even a sub scale trucking company. It is the user of infrastructure, not infrastructure itself.  

 

So, if you are considering an investment into an infrastructure fund or are perhaps an “infrastructure-minded investor, it would pay to beware, the lines seem to be getting rather blurred.